China XD Plastics Company Limited (CXDC) CEO Jie Han on Q2 2019 Results - Earnings Call Transcript

Aug. 14, 2019 3:26 PM ETChina XD Plastics Company Limited (CXDC)
SA Transcripts profile picture
SA Transcripts
132.62K Followers

China XD Plastics Company Limited (OTC:CXDC) Q2 2019 Earnings Conference Call August 14, 2019 9:00 AM ET

Company Participants

Shaojie Wen - IR

Jie Han - Chairman & CEO

Taylor Zhang - CFO

Conference Call Participants

Matthew Larson - National Securities

Peter Siris - Guerrilla Capital Management LLC

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Second Quarter 2019 China XD Plastic Company Limited Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that this conference is being recorded today.

I would like now to hand the conference over to your host today Mr. Wen Shaojie. Thank you. Please go ahead.

Shaojie Wen

Hi, everyone. Thank you all for joining us for the China XD Plastics' Second Quarter 2019 Financial Results Conference Call. Joining me on the call today are Mr. Jie Han, Chairman and CEO; Mr. Qingwei Ma, Chief Operating Officer; Mr. Taylor Zhang, Chief Financial Officer; Mr. Junjie Ma, Chief Technology Officer.

Earlier today, China XD Plastics issued a press release announcing the second quarter 2019 results. Before Management's presentation, I would like to refer to the Safe Harbor statements in connection with today's conference call and remind our listeners that management's prepared remarks during the call may contain forward-looking statements, which are subject to risk and uncertainties and that management may make additional forward-looking statements in response to your questions.

All statements, other than statements of historical fact contained, are forward-looking statements including but not limited to the company's growth potential in the international market; the effectiveness and profitability of the company's product diversification; the impact of the company's product mix shift to more advanced products and related pricing policies; the volatility of the company's operating results and financial condition; the company's projections of performance in 2019 and other risks detailed in the company's filings with the SEC and available on its website at www.sec.gov. These forward-looking statements involve known and unknown risk and uncertainties and are based on current expectations, assumptions, estimates and projections about the company and the industry. The company, therefore, claims the protection of the Safe Harbor for forward-looking statements that is contained in the Private Securities Litigation Reform Act of 1995. Actual results may differ from those discussed today and we refer you to a more detailed discussion for the risk and uncertainties in the company's filings with the Securities and Exchange Commission.

In addition, any projection as to the company's future performance represents management's estimates as of today, August 14, 2019. China XD Plastics assumes no obligation to update these projections in the future as market conditions change. To supplement the financial results present in accordance with the U.S. GAAP, management will make reference to earnings before interest expense, income tax, depreciation and amortization, which we refer to as EBITDA. EBITDA is a non-GAAP financial measure reconciled from net income, which the company believes to provide meaningful additional information to better-understand its operating performance. A table reconciling net income to EBITDA can be found on the earnings press release issued earlier today.

Now, I would like to turn the call over to our Chairman and Chief Executive Officer, Mr. Han. Mr. Han will be speaking in Chinese and I will translate his opening remarks into English.

[Foreign Language]

Jie Han

[Foreign Language]

We are pleased with our quarterly results with significant top and bottom line growth. During the first half of this year, we have weakness in both production and sales of China's auto industry, trending low for 12 consecutive months. Amidst the negative growth environment, the small and medium-sized competitors of our industry in China has experienced difficulty to fulfill customers' orders due to reasons such as changing financial conditions and tougher environmental policies. As a result, customers have started redirecting their orders to larger suppliers such as China XD.

During the second quarter of 2019, the company was able to successfully leverage the increasing customer demand and upsell its higher end products produced with higher price raw materials in China, evidenced by our stable sales growth in all domestic region. This makes us well-positioned to execute our strategic plans for 2019.

[Foreign Language]

We are particularly pleased to see more revenue contributions from our successful trial production at our production base in Dubai, a positive sign in our effort of penetrating international market with our high-end products. The growth in sales overseas during the second quarter of 2019 broadened our geographical reach to customers in Europe, Middle East and other international regions. We will try to work [ph] with global high quality customers in automotive sector and other new fields.

[Foreign Language]

We take pride of our achievement in the past and remain confident the long-term prospect of our business, Chinese government has recently issued supportive policies toward non-state owned enterprise. This will drive the success of our company's expansion strategy in multiple regions and sectors. We will be more fiscally vigilant and responsible and stabilize our capital structure by replacing more short-term debts with longer term instruments among other means in order to maintain a stable and sound balance sheet and expect turbulence in the future.

[Foreign Language]

We are committed to completing our industrial project in Heilongjiang base for upgrading existing facilities of our 100,000 metric tons capacity of engineering plastic in the fourth quarter of 2019. Together, with the production capacity ramp up in Dubai, we remain confident in our ability to make further inroads into more specialized high-end products for various important new markets.

[Foreign Language]

We believe that our increased production capabilities in Heilongjiang and Dubai geographical expansion and more diversified customer base, both stringent and augment our core automotive business. Further, our new development project which leverage our technical expertise could lead to additional new business. We view our self as the leader in the polymer composite sector which will enable us to provide in innovative technology solution for China's modernizing transportation, energy, healthcare and industrial sectors. We reiterate our financial guidance for fiscal 2019 and continue to be excited by our core market positioning and expand platform for growth.

[Foreign Language]

With that, I will now turn the call over to Taylor Zhang, our CFO to walk you through our financial. Taylor?

Taylor Zhang

Thank you, Mr. Han, thank you, Shaojie, and thank you everyone for joining our call today. Before I review the numbers, let me remind you that all figures I discuss are for this reporting period, the second quarter of 2019, unless I state otherwise. Additionally, any year-over-year comparison is to the second quarter of 2018 and any sequential comparison is to the first quarter of 2019. So let's go over our second quarter results.

Revenues were $463.1 million in the second quarter ended June 30, 2019, an increase of $145.8 million dollar or 46% compared to $317.3 million in the same period last year. This was due to approximately 51.4% increase in average RMB selling price and 2.8% increase in sales volume, as compared with those of the same period last year and partially offset by 9.5% negative impact from its increase due to depreciation of RMB against U.S. dollars. For the three months period ended June 30, 2019, revenues from domestic increased by $128.3 million due to increase of 48.3% in the average RMB selling price of our products. The increase of 1.1% in sales volume as compared with those of last year, and partially offset by the depreciation of RMB against U.S. dollar by 9.5%.

Those are the positive efforts to expand our customer business and to meet their orders, the company has increased overall gross in all parts of China. We have sales gross of 118.9% in northeast China, 16.3% in central China, 12.1% in southern China, 11.9% in north China, 8.7% in southwest China, and 4.3% in east China. As for the RMB selling price, the increase of 48.3% was mainly due to the increased sales of new categories of high-end products of PA66 and PA6, produced with high priced raw materials with higher selling price in the most end-markets.

For the three months period ended June 30, 2019, revenues from overseas market was $17.5 million as compared to $53,353 of the same period in 2018. Our successful trial production at our production base in Dubai in November 2018, the company has established business relationships with new customers in UAE and India and shipped products and business in Europe. We are optimistic about the prospect of our business expansion overseas. Gross profits was $65.3 million in the second quarter ended June 30, 2019 compared to $56.2 million in the same period last year. The reason in increase of 16.2% or $9.1 million, a gross margin decrease to 14.1% during the second quarter from 17.7%, primarily due to the adopted discounting pricing strategy in domestic market in order to obtain capitals [ph] compared to that of the prior year.

G&A expenses were $5.8 million for the quarter ended June 30, 2019 compared to $11.2 million of last year, a decrease of 48.7% or $5.5 million. The decrease was primarily due to our approach of optimizing the management structure, enhancing efficiency leading to a decrease of $2.5 million in share-based compensation, $2 million in salary and welfare, $1 million in traveling, transportation and miscellaneous expenses.

R&D expenses were $9.6 million during the quarter ended June 30, 2019 compared to $12.3 million during the same period last year, representing increase of $4.3 million or 81.1%. This significant increase was primarily due to elevated R&D activities to meet the new higher specification requirements from potential customers, especially overseas; and increased efforts directed towards application in new electrical equipments and electronics, alternative energy applications, power devices, aviation equipment and ocean engineering.

As of June 30, 2019, the number of ongoing research and development products was 371. Operating income was $49.7 million for the second quarter of 2019 compared to $36 million for the same period last year, representing an increase of $18.7 million or 38.1%. This increase is primarily due to the higher gross profits, lower selling expenses and G&A expenses, partially offset by higher R&D expenses.

Income taxes benefit [ph] was $2.6 million for the second quarter of this year, representing an effective income tax rate of 6.2% compared to income past expenses of $5.5 million in the same period last year, representing an effective tax rate of 16.8%. This significant decrease of expected income tax rate was primarily due to the increase of potential reduction [ph] in R&D expenses resulting from increased R&D expense, incurred and the new pass issued by China that are already [indiscernible] to increasing R&D expenses of potential reduction rates from 50% to 75% for our PRC entities.

The decrease of continuous operating losses occurred in overseas subsidiaries such as [indiscernible] Holding Hong Kong, the effective tax income rates for the three months period ended June 30, 2019, efforts from PRC statutory income constraint of 25%, primarily due to situation that's prevential income tax rates, reversal of R&D recognized tax benefits as occurred in 2013, and 75% additional deduction of R&D expenses of major PRC operating entities.

Net income was $40.1 million for the second quarter of 2019 compared to $27.2 million for the same period of 2018, representing increase of about $12.9 million or 47.4%. Basic and diluted earnings per share for the three months period ended June 30, 2019 was $0.60 [ph] compared to $0.41 per basic and diluted share for the same period last year. The average number of shares used in the complication of basic and diluted earnings per share in the current quarter was 50.9 million compared to 50.3 million shares of basic and diluted earnings per share in the prior year period. EBITDA were $70.1 million for the second quarter of 2019 compared to $55.3 million for the same period last year, representing an increase of $14.8 million or 26.8%. For a detailed reconciliation of EBITDA, a non-GAAP measure to its nearest GAAP equivalent, please see the financial table at the end of our press release.

Now let's turn to the balance sheet. As of June 30, 2019 the company had $506.9 million in the total amount of cash, cash equivalents and restricted cash, an increase of $139.9 million or 38.1% as compared to $355 [ph] million as of December 31, 2018. As of the end of second quarter this year, working capital was $35.2 million as compared to the current ratio of 0.9% as of December 31, 2018. Stockholder's equity as of June 30, 2019 was $798 million, an increase of $49.1 million or 6.6% as compared to $748.9 million as of December 31, 2019.

Cash, cash equivalents and increased cash was by 38.1% due to the increase of the net cash provided by financing activities and our rating activities. The inventory increased by 18.4% as a result of more positive and materials and common strategy to stock-up finished goods for upcoming orders. The average short-term and long-term bank loans increased by 10.6% due to the use of our line of credits to support operating and investing activities in Heilongjiang Group and Sichuan [ph].

Now before we open the call to your questions, I would like to note that for any question directed to management in China, I'll translate both their questions and their answers. If you want to ask a question in Chinese, please also ask in English for the benefit of our listeners. Please also note that we will only be able to respond to question about our financial and operating results. For other matters including the going private offer, we refer you to our already-issued press releases. We will now be able to respond to questions that are directed to the principles of the going private offer about the proposed transaction.

With that we'll open the call to your question. Operator?

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question comes from the line of Matthew Larson from National Securities. Please go ahead.

Matthew Larson

Good evening to those in the PRC and good morning to people listening here domestically. Congratulations for a good quarter. In a difficult environment, you all came through with very strong numbers. I haven't read any off the Q or anything like that, so if I have some questions that are in there, I apologize. On the debt area which has been a subject that we talked about, as a company you've lined up a number of large banks that would refinance any of your short-term debt and Mr. Han discussed that in fact some of the short-term debt have been converted to long-term. Can you discuss that in greater detail? Because I know in the last Q, Mr. Han had lent the company quite a bit of money, $10 million, and so did some other senior executives, as well as there was a loan from Standard Charter that had just been extended. Had those been refinanced?

Taylor Zhang

Hi, Matthew. Let me translate your question for the management in China to respond.

[Foreign Language]

Hi, Matthew. First of all, thanks to the common support of a private sector, especially in the form of more access to bank and on the financing from the strong sectors. We were able to make some preliminary success of our efforts to replace short-term debts with long-term and mid-term. We have which is from preliminary results, for example, Heilongjiang Bank, they have provided us mid and long-term to replace the short-term notes. We believe obviously net of the intent and the preliminary agreements we have in place with the other banks; more banks will participate in our efforts to stabilize our balance sheets and capital structure in the next one or two quarters. We'll see some more results in that timeframe.

Matthew Larson

[Technical Difficulty]. How do you see international sales for the balance of 2019? Is there numbers that you can give guidance on?

Taylor Zhang

Okay. Let me translate your question as well.

[Foreign Language]

Matthew, based on the current information we have, the order from the customers overseas, for the remainder of this year, we have all these from customers approximately $50 million. This is based on our current information. It could be anywhere more than that, but we'll keep you guys updated as the quarter goes by.

Matthew Larson

All right, that's great. And then I have one last question and I'll let somebody else call in. Your average selling price was up sharply and the reason in the news release was that you were focusing on higher end plastic products. Can you just give me a little description of what the difference is between a lower end and higher end plastic product? Is it biodegradable? Is it just a higher quality and the car makers and new other customers just prefer that? Is it more durable? I don't know enough about your business to see how that sort of really attractive pricing would flow through.

Taylor Zhang

Okay, Matthew. For example, one particular product line in this quarter had been a very good seller, PA66 or PA6, these are engineering plastics. By definition, they are very high quality, very durable, mostly used in [indiscernible] and in the whole application where the working environment, for example, temperature is extremely high and you can imagine low quality cannot withstand the heat or the chemical erosion, etcetera, etcetera. So, there is a lot of engineering that goes into high-end products; that's why they command higher pricing and also higher margin. So this is just one of the examples of higher quality, higher products we make and we have been working on that front for many years.

Matthew Larson

Okay. So it just sounds like in a tough environment, because of the auto sales decline we've seen year-over-year, CXDC, China XD or Xinda has been able to pick up significant market share at the detriment to a weaker or smaller competitors and that going forward, we can expect and hope for continuation particularly if your balance sheet continues to improve and if there is an upturn in the market which one would expect at some point. Again, great quarter. It's good to hear as a long-term shareholder and we'll just wait to see how things are in the balance of the year. I'll let somebody else make the call. Thank you very much.

Taylor Zhang

Okay. Thank you, Matthew.

Operator

[Operator Instructions] Our next question comes from the line of Peter Siris. Please go ahead.

Peter Siris

[Foreign Language]

Hi Taylor, couple of questions. First, when you were answering Matthew's question about the refinancing of the debt, you said the next one to two quarters. Is that correct?

Taylor Zhang

Yes, Peter. Mr. Han said that in the next one or two quarters we'll see more results from other banks that we've been working with.

Peter Siris

Okay. So I know you can't say anything about the buyout, but it's reasonable to assume that the buyout is not going to occur until after the debt is refinanced? Is that a reasonable assumption?

Taylor Zhang

Let me ask the management in China.

Peter Siris

Okay.

Taylor Zhang

[Foreign Language]

So the answer comes from Mr. Han, our Chairman. As you remember, because of the deleveraging efforts by the government. Also, it has a profound impact on the private sector including us, but fortunately, I think we're recognized by major financial institution we've been able to sustain and weather the turbulence. So…

Peter Siris

I'm having trouble hearing you.

Taylor Zhang

Okay, can you hear me now? Peter?

Peter Siris

Yes, a little better. Yes.

Taylor Zhang

Okay. With the help and recognition by major financial institutions and banks in China, we are able to make some progress this year. We are about right about the timing of the combination of capital structure improvements will probably happen proceeding the potential funding for going private. Right now we are facing a little bit of a hiccup because of the stricter currency restriction in China but Chairman Han said he is going, he is continuing to pursuing the transaction and he still remains optimistic about our efforts.

Peter Siris

Okay. My next question is on inventory. You have $734 million of inventory at the end of the quarter. On an ongoing basis, what's the right amount of inventory?

Taylor Zhang

[Foreign Language]

The inventory would have been -- actually there have been some changes. Peter?

Peter Siris

Taylor, I can't hear you.

Taylor Zhang

Okay. Can you hear me now, Peter?

Peter Siris

Can't hear you Taylor?

Taylor Zhang

Is it better? Hi Peter, is it better now?

Peter Siris

Yes.

Taylor Zhang

Okay. So the inventory level has several factors right now. First of all, it is -- we are seeing the change of our product mix, we have more products that are in no other sectors which is the path of design [ph]. And secondly, we also have success in the high-end and high pricing, high margin products moving faster; so definitely inventory is trending to a good positive direction. We think in the next one or two quarters we're going to see significant change of our inventory into the right direction trending now.

Peter Siris

Okay. My next question has to do with Dubai. You've spent -- I believe, like $550 million in building your factories in Dubai. When are we going to see sort of real revenues and earnings coming out of Dubai?

Taylor Zhang

Okay, let me take your question about Dubai.

[Foreign Language]

So Peter, we actually started producing and selling from Dubai production base since November 11, 2018 last year. And so far, this year we have for the first half -- the revenue contribution from Dubai was approximately $23 million, and we have mentioned for the remainder of this year we have received order in excess of $50 million. So you see we have started seeing the revenue contribution from Dubai and we are obviously very pleased to see the results and also encouraged by the prospects of our Dubai business.

Peter Siris

Great. And finally, I want to ask about guidance. It says in the release that revenues for the year will range from $1.3 billion to $1.6 billion. And the -- if I look at the fact that you've done $765 million for the first 6 months, that basically says that revenues in the second half will be slower than in the first half and I'm curious why that would be? Or is the guidance just conservative?

Taylor Zhang

Peter, there -- as you know, we have to report to the company for a very, very long time. And thank you for your patience and loyalty to the company. So the management does -- I think there is certain amount of conservatism in the guidance and I think that has to be moved to the next quarter or end of the year. We will provide update when that is done.

Peter Siris

Okay.

Taylor Zhang

All right. Thank you, Peter.

Operator

[Operator Instructions] There are no questions at this time. I'd like to hand the conference back to our presenters. Please continue.

Shaojie Wen

On behalf of China XD Plastics we want to thank you for your interest and participation in this call. If you would like to speak with us further, please call either myself or Taylor in China XD's New York office. The contact numbers for all of us are listed at the end of the press release. Thank you.

Operator

Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all disconnect.

Comments

To ensure this doesn’t happen in the future, please enable Javascript and cookies in your browser.
Is this happening to you frequently? Please report it on our feedback forum.
If you have an ad-blocker enabled you may be blocked from proceeding. Please disable your ad-blocker and refresh.